Retirement investing: Think long term

(Money Magazine) -- Last August something spooked me in the markets, so I shifted my 401(k) and Roth IRA accounts out of stock funds and into bond funds. What a mistake! It's pretty much been a steady climb upward since then.

I can't decide now whether to hold tight for a decline and then get back into stocks, or just move back now in case the bull continues. I won't need the funds for another 25 years or so. Any advice?-- Michael Simmons, Arlington, Virginia

Yes. My advice is that you stop this nonsense of attempting to time your moves in and out of stocks to avoid short-term setbacks and capitalize on market rebounds.

Because if you continue to try, I can pretty much assure you that between now and the time you retire, you're going to make the same mistake over and over and over again.

Why do I say this? Well, think about it. Whether it's fear of fallout financial and otherwise from the disaster in Japan, worries about political instability in the Mideast, concerns about job growth in the good old USA or any of the other issues that regularly make the headlines, there is always something that can spook you.

Heck, even when things are going swimmingly, all the news is positive and the market is on a roll, you can't help but wonder whether things are going too well, and whether it's just a matter of time before we get another brutal reminder of how quickly and dramatically stocks can reverse course.

So the big question for people who are saving and investing for retirement in 401(k)s, IRAs and other accounts is how do you deal with the inherent uncertainty of the financial markets?

Essentially you have two choices. One is to do what you're doing and try to zig before the markets zag. But whether you go by instinct or metrics like price-earnings ratios, market breadth or volatility indices, the fact is that consistently calling the short-term direction of the market ranges from exceedingly difficult to next to impossible.

Investors invariably get it wrong. Witness the fact that while U.S. stocks were in the midst of a near 90% run-up from the trough of March 2009 through the end of 2010, most people were shunning stock funds in favor of bond funds.

The second -- and to my mind more rational -- approach is to admit that predicting market movements is a fool's game and instead set a strategy that allows you to participate in the market's long-term growth while mitigating the risk.

And the way to do that is create a stocks-bonds mix for your 401(k) and IRA accounts, and then largely stick with it regardless of whether your gut or whatever market indicators you follow are telling you that stocks are about to take a swan dive or soar to new heights.

Now, I can't tell you exactly what blend of stock and bond funds is right for you.

But the fact that you're investing retirement savings you won't need for 25 years suggests that you'll likely want to have somewhere between 80% and 90% of your retirement accounts in a mix of broadly diversified stock funds with the remainder in bond funds.

You may want to dial back that stock stake, however, if you get especially anxious when your retirement account balance takes a hit. The idea is to settle on a stocks-bonds allocation you'll be able to live with in markets good and bad.

To get a sense of how different proportions of stocks and bonds might behave, you can try out different allocations in Morningstar's Asset Allocator tool.

What you definitely do not want to do, though, is get caught up in a fruitless guessing game of trying to decide whether to get into stocks or into bonds now or to wait until the market corrects.

Go that route, and you may really end up getting spooked at retirement when you see how sluggishly your 401(k) has grown over the previous 25 years.